Competition and Manipulation in Derivative Contract Markets
95 Pages Posted: 2 Jul 2019 Last revised: 29 Jul 2020
Date Written: July 28, 2020
This paper studies manipulation in cash-settled derivative contract markets. When traders hedge factor risk using cash-settled derivatives, which are settled based on the price of a spot good, traders can manipulate settlement prices by trading the spot good. In equilibrium, manipulation can make all agents worse off. I define two measures of manipulation-induced welfare losses, which can be estimated using commonly observed market data. Using these measures, I estimate how large manipulation-induced distortions would be if COMEX gold futures were cash-settled using the London Bullion Market Association gold price benchmark.
Keywords: derivatives, manipulation, regulation
JEL Classification: D43, D44, D47, G18, K22, L40, L50
Suggested Citation: Suggested Citation